ISSN 0103-9466 
                                                  335 
      The international monetary system hierarchy: 
        current configuration and determinants 
  
                      Bruno De Conti  
                  Daniela Magalhães Prates 
                             
                        Abril 2018 
  
                The international monetary system hierarchy:  
                                                           1
                   current configuration and determinants   
                                                       Bruno De Conti 2 
                                               Daniela Magalhães Prates 3 
                 
                 
                 
          Abstract 
          This paper aims to analyze the current International Monetary System (IMS), focusing on the usage 
          of different national currencies at the international scenario. In fact, only a few currencies are able 
          to fulfill money classical functions beyond the national borders of their issuing country, configuring 
          an IMS that is absolutely hierarchized. It is broadly known that the US dollar is the key-currency, 
          but some questions arise when the analysis is deepened, among which: what is precisely the share 
          of each currency in the fulfillment of the three functions of money at the international level? What 
          determines the current configuration of the IMS? In order to answer to these questions, this paper 
          presents firstly the data for the international usage of currencies, splitting the analysis into the 
          private and the public usage – i.e.: means of payment, price setting and investment currency (private 
          usage);  and  intervention  currency,  reference  currency  and  reserve  currency  (public  usage). 
          Although there is not a database that provides all these information, a quest over many sources 
          allows us to provide a map of the current IMS configuration. Secondly, this paper analyses the 
          possible  determinants  of  the  international  usage  of  national  currencies,  proposing  three  most 
          important ones: i) the dimension of the national economy and its integration in the world economy; 
          ii) the geopolitical power of the country; iii) the government’s political will to internationalize the 
          currency.  Thirdly,  the  paper  examines  the  effects  of  the  global  financial  crisis  over  the  IMS 
          configuration, showing that the US dollar has kept its role almost unaltered, but the euro has 
          suffered a loss in its share in the international fulfillment of some money functions – notably as 
          means of payment and public reserve currency; on the other hand, some peripheral currencies are 
          becoming more and more important at the international sphere, specially the Chinese yuan, whose 
          share in international transactions is still modest, but rapidly increasing.  
          Keywords: International Monetary System; Currency hierarchy; Dollar, Euro; Yuan. 
           
          Introduction 
                All over the history, the international economy has never had a global 
          currency, in the sense of a currency that is issued and managed by a supranational 
          institution in order to be used by all agents in the whole world. If all countries in 
          the world required the use of its national currency for the international exchanges, 
                                                           
               (1) Presented at The 28th Annual EAEPE Conference – Manchester, UK, 03-05 November 2016. 
               (2) Lecturer at the University of Campinas (IE/Unicamp), Brazil. 
               (3) Associate Professor at IE/Unicamp and CNPq researcher. 
                              Texto para Discussão. Unicamp. IE, Campinas, n. 335, abr. 2018. 
                                           Bruno De Conti / Daniela Magalhães Prates 
                there would be a clear incompatibility. In the same way that money facilitates 
                economic operations at the national level, choosing one (or some) reference 
                currency(ies) has been essential for the development of international exchanges. 
                Hence, if on one hand international exchange could engender a fractionated 
                international monetary system (IMS) – due to the presence of several national 
                currencies –, on the other hand this possible trend is surpassed by a strongest 
                trend (associated to political and economic reasons) that determines that only a 
                few currencies are used at the international level (Aglietta, 1979). Moreover, 
                historically the currency of the hegemonic country performs the role of the key 
                currency (i.e. means of payment; unit of account and denomination of contracts; 
                and reserve of value at the international level)4. Consequently, a hierarchized 
                structure is erected in the IMS. 
                          Some currencies therefore, go beyond the national borders and acquire 
                an international usage. This usage of currencies at the international level is guided 
                by a set of rules that configures the modus operandi of the IMS. The three basic 
                axes of an international monetary system are the exchange rate regime, the degree 
                of capital mobility and the characteristics of the key-currency. In the period when 
                the world economy was under the Bretton Woods (BW) Agreement – 1945 to 
                1971/1973 – there were clear and mandatory rules regarding these three axes for 
                all the signatory countries, since exchange rates were fixed in relation to the US 
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                dollar ; the dollar convertible in gold played the role of the key-currency; and 
                capital mobility was restricted. With the end of the BW agreement, countries have 
                autonomy – at least from a formal point of view – to choose their exchange rate 
                regime  and  their  financial  openness  degree6,  so  there  is  no  longer  a  single 
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                standard, as in the previous system . That’s why some authors name the current 
                IMS as a “non-system” (Faugère; Voisin, 1993; Lago, Duttagupta; Goyal, 2009). 
                                                                 
                        (4) Brunhoff (1996) argues that the establishment of the key currency is the result of an implicit 
                agreement among developed countries that reflects the underlying power relations. In section 3, this paper will 
                discuss the determinants of the international usage of a currency. 
                        (5) The exchange rates were fixed, but with adjustment clauses in the event of fundamental imbalances 
                in the balance of payments of the signatory countries. After adjusting in the early post-war, however, these 
                exchange rates were pretty much fixed. For details, see Van der Wee, Hogg and Hall (1987) and Eichengreen 
                (2000). 
                        (6) “Financial openness” refers to the elimination (or reduction) of barriers to the mobility of financial 
                flows across national borders. 
                        (7) In reality, there is some pressure from central countries and multilateral institutions advocating the 
                adoption  of  floating  exchange  rate  regimes  and  financial  openness.  Disobedience  regarding  these 
                recommendations does not mean however sanctions by the International Monetary Fund (IMF), as it occurred 
                in the BW period. The global financial crisis triggered by the US subprime market has even alleviated this 
                pressure for financial openness. Indeed, multilateral institutions have admitted the necessity of capital controls 
                in some of the so-called emerging countries (Blanchard; Dell’ariccia; Mauro, 2010). 
                Texto para Discussão. Unicamp. IE, Campinas, n. 335, abr. 2018.                                2 
                       The international monetary system hierarchy: current configuration and determinants 
                Another important change occurred in the nature of the key currency, that has a 
                fiduciary character in the current IMS. However, there is a feature of this system 
                that  remains  unaltered  after  the  end  of  the  Bretton  Woods  Agreement:  its 
                hierarchical character. The dollar remains the key-currency and most national 
                currencies do not fulfill traditional money functions internationally. It is precisely 
                this distinction between the currencies that are used and those that are not used at 
                the  international  level  that  determines  the  hierarchical  character  of  the 
                international monetary system. 
                          This  paper  aims  to  analyze  the  current  IMS,  especially  from  the 
                perspective of the currency hierarchy. Due to the impossibility of working with 
                all countries and currencies of the world, the analysis focuses sometimes on three 
                groups of countries: the central ones, the Latin American ones and the Asian ones. 
                For each of these groups, some representative countries were chosen: United 
                States, United Kingdom, Japan, Switzerland and the Eurozone – or Germany, 
                when data for the euro area are not available (central countries); China, India, 
                South Korea and Malaysia (Asian countries); Brazil, Argentina, Mexico and 
                Chile (Latin American countries). 
                          Besides this introduction, the paper has four sections: section 1 analyzes 
                the functions of money internationally, their imbrications and contradictions; in 
                section 2, the current configuration of the IMS is presented; section 3 proposes 
                the main factors which determine the ability of a currency to be used at the 
                international level; section 4 presents some final remarks. 
                           
                1 Money functions at the international level 
                          The three classical functions of money are: means of payment, unit of 
                account and store of value. Internationally, several authors emphasized these 
                three functions, but advocate the importance of establishing a distinction between 
                the private and public uses of money (e.g., Cohen, 1971; Cooper, 1975; Krugman, 
                1991). They justify this decomposition claiming that the official demand (mainly 
                from central banks) has generally different characteristics from that of private 
                agents. Thus, the three functions of money are decomposed into six, in order to 
                consider  separately  the  private  and  public  uses:  means  of  payment/vehicle 
                currency;  currency  of  denomination;  investing  and  financing  currency; 
                intervention currency; reference currency (anchor); reserve currency (Table 1). 
                          Although the definition of the different functions of money is important 
                from an analytical point of view, they are completely intertwined, making it 
                Texto para Discussão. Unicamp. IE, Campinas, n. 335, abr. 2018.                                3